Is natural gas becoming the new oil?
At a time when the nation is chafing at its persistent dependence on foreign oil, it is becoming clear that the United States may be headed for the same situation with natural gas.
Demand is growing far faster than supply from domestic sources or from friendly neighbors like Canada. Soon, probably within the next decade, the United States will become a significant importer of gas from regions like North Africa, the Middle East, the former Soviet Union and the Caribbean, transported in liquefied form by giant tanker ships.
Faced with that prospect, policy makers and industry executives are pondering whether that means natural gas will become another vulnerable front in American diplomacy and energy security, posing the same quandaries and threats that crude oil does now.
The United States will probably be able to meet most of its gas needs with domestic production for another 20 years. But some analysts worry that, as with oil, gas supplies around the world will not expand fast enough to meet rising global demand, driving prices higher even as the United States turns increasingly to imports.
Like oil deposits, big gas reserves are often found in politically troublesome places. Because few of the world’s gas-rich countries are stable, open democracies, there is a danger that gas revenue will flow into the coffers of corrupt, brutal governments, or that gas supplies will be disrupted by domestic instability the way oil exports have been in Venezuela, Nigeria and elsewhere.
In the worst-case outlooks, about which industry experts are deeply divided, the United States could find itself beholden to a small number of countries to keep its lights on, a prospect with profound implications for American foreign policy.
“Do we ever want to be in a situation in 20 years when we say, ‘We’d better do this for the Russians or we’ll be in a blackout?’ ” said Amy Myers Jaffe, senior energy analyst at the James A. Baker III Institute for Public Policy at Rice University in Houston.
The United States now imports about 57 percent of its crude oil, but only 16 percent of its natural gas, and nearly all of that comes by pipeline from Canada. By 2025, according to recent Energy Department estimates, the country will be consuming 37 percent more gas – 31.2 trillion cubic feet a year, compared with 22.8 trillion in 2002.
Most of the growth in demand is coming from power plants that run on natural gas, which burns more cleanly than other fossil fuels. Supplies are already tight, pushing prices to their highest levels in 20 years, and the government said that it did not expect domestic supply to keep up with demand.
Some gas-rich areas in the United States are closed to oil and gas drilling for environmental or other reasons; much of the remainder has already been developed.
As for Canada, much of its gas may soon be consumed at home rather than exported, said Sara Banaszak of PFC Energy, a Washington consulting firm, because the production of oil from tar sand deposits being developed in Alberta requires a great deal of gas.
“So what remains for consideration is L.N.G.” or liquefied natural gas, imported by tanker from distant countries, said David Nissen, director of the International Energy Management and Policy program at Columbia University.
Gas prices are now so high, and likely to stay high, that it makes financial sense to invest the large amounts of capital required to build liquefied gas operations around the world, Mr. Nissen said. “The constraints on those projects are not economic, but political, social and structural,” he said.
Right now, liquefied gas imports account for 2 percent of annual gas consumption in the United States. Gas transported in this form must be supercooled to liquid form and pumped into specially designed tankers, then warmed back up to its gaseous state at a receiving terminal before being piped to the user.
Oil and gas are often found in the same places, and the biggest oil producers are also among the biggest gas producers. Indonesia is the leader so far in liquefying gas for export, mainly to customers in East Asia. But about 75 percent of known global gas reserves are in the nations of the former Soviet Union – mostly Russia – or in the Middle East, according to Energy Department figures. Projects to expand L.N.G. terminals have sprouted in many places, including Qatar, Nigeria and Trinidad.
Gradually, the need for gas has begun to shape United States foreign policy, just as the need for oil has for generations, industry analysts said. For example, last December the Energy Department organized a Washington conference of energy ministers from the major liquefied gas exporting countries. The administration has also been pressing Russia to build a liquefied gas plant at Murmansk, with an American company as a partner. And some analysts say that the administration’s recent decision to lift sanctions against Libya grew in part from a desire on both sides to develop liquefied gas operations in Libya, whose gas reserves are richer than the oil reserves.
“Libya is a big L.N.G. play, and that’s why they were desperate to get the sanctions off,” Ms. Jaffe of Rice University said. For the Libyans’ part, she said, “they felt the L.N.G. market is the U.S. market, and they needed an American company.” On the American side, she said, “the sanctions moved because L.N.G. is big business.”
“Think of all those years when the sanctions didn’t move, when we were worried about two or three oil fields.”
Even so, bringing liquefied gas to market can be even more complicated than producing and exporting oil. The investment required to build plants from scratch can be staggering, and the time line is long. Ms. Banaszak of PFC Energy estimated that building a liquefaction plant generally costs around $2 billion; the ships needed to carry the gas, another $2 billion; and a regasification terminal on the receiving end, $300 million to $500 million more. According to one Western oil executive, building the whole chain can take 40 to 42 months.
Those figures do not include the costs of finding and pumping the gas out of the ground. But in many cases, gas is already available, a byproduct of oil development that now largely goes to waste.
The expense and complexity of getting liquefied gas projects built have prompted industry experts to warn that as demand for gas grows, supply may not be there to meet it. “Despite huge global gas prices, no major new ‘greenfield’ L.N.G. project is starting this year,” Deutsche Bank noted in a July report. “The globe is underinvested in the infrastructure required to meet strong demand for oil and gas.”
So it appears unlikely that liquefied gas imports will do much to lower prices in the United States soon. “People who are moving to make supply available are not moving fast enough,” said James T. Jensen, an independent energy consultant in Weston, Mass. “It will be a tight market for some time, and that will have price implications.”
Producers generally sell gas under long-term contracts, often lasting several years and negotiated with buyers well in advance. How, then, can a consuming country cope when its supply is disrupted, as happened in 2001 when insurgents in the Indonesian province of Aceh forced a four-month shutdown of Exxon Mobil’s Arun liquefied gas plant there?
There is no spot market in liquefied gas now, though one is expected to emerge, allowing buyers to find some new supplies on short notice. But as it does, Ms. Jaffe said, gas prices will become global. Then, a disruption in anyone’s supply would push up prices for everyone, as customers scrambled to make up the shortfall, as now happens in the oil market, Ms. Jaffe predicted.
Oil can be loaded and unloaded at hundreds of ports around the world, but there are, and will be, far fewer liquefied gas operations, some industry analysts said, making any disruption more far reaching.
The answer to these threats is to have as many sources of gas as possible, according to oil and gas executives and government officials who back liquefied gas development. “What are the chances of 20 governments having a coup at the same time?” one Washington official asked. “It’s better to have contracts with 20 countries of dubious governments than with 3.”
While diversity of supply would be helpful, some analysts mention other factors that would still complicate efforts to overcome disruptions. There are different types of liquefied gas with varying amounts of propane and ethane, and some grades can be handled only at certain regasification terminals in the United States, Mr. Nissen said. And with most gas committed to long-term supply contracts, producers may not have much inventory available to trade in the event of a disruption, he noted.
The drive to procure more gas would necessarily deepen the United States’ ties to countries with poor records on human rights and political freedom. If the track records of oil-rich countries are any indication, internal political turmoil may periodically threaten the stability of gas supplies from those countries.
“If you look at countries that are potentially big L.N.G. producers, like Nigeria and Angola, they already get money from oil, and they have a poor record of governance, and other countries that are big new producers, like Turkmenistan, are even worse,” said Arvind Ganesan, director of business and human rights at Human Rights Watch. “If you make huge investments and have long-term contracts with these countries, isn’t that going to suppress our government’s willingness to speak out about the underlying causes of instability in these countries, like corruption, human rights abuses and conflict?”
Mr. Ganesan suggested that in the 3 to 10 years that the United States still has before its economy grows profoundly dependent on liquefied gas imports, the government should insist on “an extremely high degree of transparency” about finances from the producing countries and the international oil and gas companies involved.
There is also time to develop alternative energy and conservation technology, and to review existing bans on drilling in protected parts of the United States, Ms. Jaffe said.
“We have 20 years to prepare,” she said. “We can’t wait until we are dependent on the Middle East and Russian gas, and that is a political problem. The time to think about it is now.”